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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the first quarterly period ended March 31, 2003
Commission file number: 0-27824
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0684451
State of Incorporation IRS Employer Identification No.
580 White Plains Road, Tarrytown, New York, 10591
(Address of principal executive offices, including zip code)
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Registrant's telephone number, including area code: (914) 332-4100
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: [ X ] Yes [ ] No
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Indicate by check whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act): [ ] Yes [ X ] No
On March 31,2003, there were 18,857,475 shares of Common Stock outstanding.
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SPAR GROUP, INC.
Index
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
Consolidated Balance Sheets
as of March 31, 2003 and December 31, 2002...................3
Consolidated Statements of Income for the three
months ended March 31, 2003 and March 31, 2002...............4
Consolidated Statements of Cash Flows
for the three months ended March 31, 2003 and
March 31, 2002...............................................5
Notes to Consolidated Financial Statements...................6
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................11
Item 3: Quantitative and Qualitative Disclosures About
Market Risk.................................................19
Item 4: Controls and Procedures.....................................19
PART II: OTHER INFORMATION
Item 1: Legal Proceedings...........................................20
Item 2: Changes in Securities and Use of Proceeds...................20
Item 3: Defaults upon Senior Securities.............................20
Item 4: Submission of Matters to a Vote of Security Holders.........20
Item 5: Other Information...........................................20
Item 6: Exhibits and Reports on Form 8-K............................20
SIGNATURES....................................................................21
CERTIFICATIONS................................................................22
2
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
SPAR GROUP, INC.
Consolidated Balance Sheets
(In thousands, except share and per share data)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
(Unaudited) (Note)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Accounts receivable, net 19,005 17,415
Prepaid expenses and other current assets 989 783
Deferred income taxes 903 903
-------- --------
Total current assets 20,897 19,101
Property and equipment, net 2,015 1,972
Goodwill 7,858 7,858
Deferred income taxes 705 705
Other assets 333 121
-------- --------
Total assets $ 31,808 $ 29,757
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 695 $ 422
Accrued expenses and other current liabilities 5,927 6,097
Accrued expenses, due to affiliates 2,030 958
Restructuring charges, current 773 1,354
Due to certain stockholders 951 3,951
-------- --------
Total current liabilities 10,376 12,782
Line of credit 3,617 148
Restructuring charges, long-term -- 235
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value:
Authorized shares - 3,000,000
Issued and outstanding shares - none -- --
Common stock, $.01 par value:
Authorized shares - 47,000,000
Issued and outstanding shares -
18,857,475 - March 31, 2003 188 188
18,824,527 - December 31, 2002
Treasury Stock (108) (30)
Additional paid-in capital 10,942 10,919
Retained earnings 6,793 5,515
-------- --------
Total stockholders' equity 17,815 16,592
-------- --------
Total liabilities and stockholders' equity $ 31,808 $ 29,757
======== ========
Note: The Balance Sheet at December 31, 2002, has been derived from the audited
financial statements at that date but does not include any of the
information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements.
See accompanying notes.
3
SPAR GROUP, INC.
Consolidated Statements of Income
(unaudited)
(In thousands, except per share data)
THREE MONTHS ENDED
----------------------------------------
MARCH 31, MARCH 31,
2003 2002
----------------------------------------
Net revenues $18,739 $16,046
Cost of revenues 11,251 9,751
----------------------------------
Gross profit 7,488 6,295
Selling, general and administrative expenses 4,943 4,967
Depreciation and amortization 378 417
----------------------------------
Operating income 2,167 911
Interest expense 68 48
Other expense 38 82
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Income before provision for income taxes 2,061 781
Provision for income taxes 783 299
----------------------------------
Net Income $ 1,278 $ 482
==================================
Basic/diluted net income per common share:
Net Income - basic $ 0.07 $ 0.03
- diluted $ 0.07 $ 0.03
==================================
Weighted average common shares - basic 18,841 18,584
==================================
Weighted average common shares - diluted 19,443 18,951
==================================
See accompanying notes.
4
SPAR GROUP, INC.
Consolidated Statements of Cash Flows
(unaudited) (In thousands)
THREE MONTHS ENDED
--------------------------------------
MARCH 31, MARCH 31,
2003 2002
--------------------------------------
OPERATING ACTIVITIES
Net income $ 1,278 $ 482
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 378 417
Changes in operating assets and liabilities:
Accounts receivable (1,590) 2,763
Prepaid expenses and other current assets (418) (35)
Accounts payable, accrued expenses and other current
liabilities 1,175 820
Discontinued operations, net -- 96
Restructuring charges (816) (178)
------- -------
Net cash provided by operating activities 7 4,365
INVESTING ACTIVITIES
Purchases of property and equipment (421) (94)
------- -------
Net cash used in investing activities (421) (94)
FINANCING ACTIVITIES
Net borrowings (payments on) line of credit 3,469 (4,018)
Proceeds from issuance of common stock 23 4
Payments on other long-term debt -- (57)
Payments on Stockholder debt (3,000) (200)
Purchases of treasury stock (78) --
------- -------
Net cash provided by (used in) financing activities 414 (4,271)
Net change in cash -- --
Cash at beginning of period -- --
------- -------
Cash at end of period $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid $ 56 $ 165
See accompanying notes.
5
SPAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, consolidated financial statements of SPAR
Group, Inc., and its subsidiaries (collectively, the "Company" or the "SPAR
Group") have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included in the financial statements. However, these interim financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto for the Company as contained in Company's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed with the
Securities Exchange Commission on March 31, 2003 (the "Company's Annual Report
on Form 10-K"). The results of operations for the interim periods are not
necessarily indicative of the operating results for the entire year.
2. RESTRUCTURING CHARGES
In 1999, the Company's Board of Directors approved a plan to restructure
the operations of the PIA Companies. Restructuring costs were composed of
committed costs required to integrate the SPAR Companies' and the PIA Companies'
field organizations and the consolidation of administrative functions to achieve
beneficial synergies and costs savings.
The following table displays a roll forward of the liabilities for
restructuring charges from December 31, 2002 to March 31, 2003 (in thousands):
QUARTER ENDED
DECEMBER 31, MARCH 31, 2003 MARCH 31,
2002 DEDUCTIONS 2003
-------------------------------------------------------------------------
Restructuring charges:
Equipment and office lease
settlements $ 1,589 $ 816 $ 773
Management believes that the remaining reserves for restructuring are
adequate to complete its plan.
6
SPAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
3. EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted
earnings per share (in thousands, except per share data):
THREE MONTHS ENDED
-------------------------------
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Numerator:
Net income $ 1,278 $ 482
Denominator:
Shares used in basic earnings per share
calculation 18,841 18,584
Effect of diluted securities:
Employee stock options 602 367
------- -------
Shares used in diluted earnings per share
calculation 19,443 18,951
======= =======
Basic and diluted earnings per common share:
Net Income - basic $ 0.07 $ 0.03
- diluted $ 0.07 $ 0.03
4. LINE OF CREDIT
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the Company and its subsidiaries (collectively, the
"Borrowers") with a $15.0 million revolving credit facility (the "New Revolving
Facility") that matures on January 23, 2006. The New Revolving Facility allows
the Borrowers to borrow up to $15.0 million based upon a borrowing base formula
as defined in the agreement (principally 85% of "eligible" accounts receivable).
The New Revolving Facility bears interest at Whitehall's "Alternative Base Rate"
or LIBOR plus two and one-half percent and is secured by all the assets of the
Company and its subsidiaries. The New Revolving Facility interest rate was
Whitehall's "Alternate Base Rate" of 4.75% per annum at March 31, 2003.
7
SPAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The New Credit Facility replaces a previous 1999 agreement, as amended,
between the Company and IBJ Whitehall Business Credit Corporation (the "Old
Credit Facility") that was scheduled to mature on February 28, 2003. The Old
Credit Facility provided for a $15.0 million revolving credit facility (the "Old
Revolving Facility"), as well as a $2.5 million term loan. The Old Revolving
Facility allowed the borrowers thereunder to borrow up to $15.0 million based
upon a borrowing base formula as defined in the old agreement (principally 85%
of "eligible" accounts receivable). The term loan under the Old Credit Facility
amortized in equal monthly installments of $83,334 and was repaid in full as of
December 31, 2001.
The New Credit Facility contains certain financial covenants (amending,
restating and replacing those contained in the Old Credit Facility) that must be
met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a capital expenditure limitation and a
minimum EBITDA, as such terms are defined in the respective agreement. The
Company was in compliance with such financial covenants March 31, 2003.
The balances outstanding on the revolving lines of credit were $3.6
million under the New Revolving Facility at March 31, 2003, and $0.1 million
under the Old Revolving Facility at December 31, 2002. As of March 31, 2003,
based upon the borrowing base formula, the SPAR Group had availability of $6.3
million of the $11.4 million unused revolving line of credit under the New
Revolving Facility.
5. RELATED-PARTY TRANSACTIONS
As of March 31, 2003, a total of approximately $1.0 million remained
outstanding under notes with certain stockholders. These notes have an interest
rate of 8% and are due on demand. The Company paid the $1.0 million balance on
these notes in April 2003.
The SPAR Group, Inc. is affiliated through common ownership with SPAR
Marketing Services, Inc. ("SMS"), SPAR Management Services, Inc. ("SMSI") and
SPAR Infotech, Inc. ("SIT"). SMS and SMSI (through SMS) provided approximately
71% of the Company's field representatives (through its independent contractor
field force) and substantially all of the Company's field management services.
Under the terms of the Field Service Agreement, SMS provides the services of
approximately 6,600 field representatives and SMSI provides approximately 90
full-time national, regional and district managers to the SPAR Marketing
Companies as they may request from time to time, for which the Company has
agreed to pay SMS for all of its costs of providing those services plus 4%.
SIT provided Internet and other computer programming services to the
Company. Under the terms of the programming agreement between SPAR Marketing
Force, Inc. ("SMF") and SIT effective as of October 1, 1998, SIT continues to
provide programming services to SMF as SMF may request from time to time, for
which SMF has agreed to pay SIT competitive hourly wage rates and to reimburse
SIT's out-of-pocket expenses.
8
SPAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
The following transactions occurred between the SPAR Companies and the
above affiliates (in thousands):
THREE MONTHS ENDED
------------------------------
MARCH 31, MARCH 31,
2003 2002
--------------- --------------
Services provided by affiliates:
SMS: Independent contractor field services $7,697 $4,585
==========================
SMSI: Field management services $1,759 $1,724
==========================
SIT: Internet and computer programming services $ 406 $ 455
==========================
Services provided to affiliates:
SMSI: Management services $ 97 $ 79
==========================
Balance due to affiliates included in accrued
liabilities (in thousands):
MARCH 31,
2003 2002
-------------------------------
SMS (SPAR Marketing Services, Inc.) $2,030 $1,078
6. STOCK OPTIONS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
Accounting for Stock-Based Compensation as amended by SFAS 148. No compensation
cost has been recognized for the stock option plans. Had compensation cost for
the Company's option plans been determined based on the fair value at the grant
date consistent with the provisions of SFAS No. 123, the Company's net income
per share would have been reduced to the adjusted pro forma amounts indicated
below (in thousands, except per share data):
9
SPAR GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
THREE MONTHS ENDED
------------------------------------
MARCH 31, MARCH 31,
2003 2002
----------------- ------------------
Net income, as reported $1,278 $ 482
Stock based employee compensation expense
under the fair market value method 445 488
--------------------------
Adjusted pro forma net income (loss) $ 833 $ (6)
Basic and diluted net income per share, as reported $ 0.07 $ 0.03
Basic and diluted adjusted pro forma net income
(loss) per share, after adjustment for stock
based employee compensation expense under the fair
market value method $ 0.04 $ --
7. SHARE REPURCHASE
The Company initiated a share repurchase program in fiscal 2002, which
allowed for a total share repurchase of up to 100,000 shares. The Company
repurchased 22,899 shares in the quarter ended March 31, 2003, for $78,327.
8. COMMITMENT AND DEPOSITS DUE TO SPAR PERFORMANCE GROUP, INC. ("SPGI")
In connection with the sale of SPGI on June 30, 2002, the Company agreed
to provide a discretionary revolving line of credit to SPGI not to exceed $2.0
million (the "SPGI Revolver") through September 30, 2005. The SPGI Revolver is
secured by a pledge of all the assets of SPGI and is guaranteed by its parent,
Performance Holdings, Inc. Under the SPGI Revolver terms, SPGI is required to
deposit all of its cash to the Company's lockbox. At March 31, 2003, the Company
had cash deposits due SPGI totaling $0.7 million. Due to the speculative nature
of the SPGI Revolver, the Company has established a reserve of approximately
$0.8 million against the $2.0 million SPGI Revolver commitment. This reserve and
the cash deposits due to SPGI are included in other current liabilities.
10
SPAR GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
Statements contained in this Quarterly Report on Form 10-Q of SPAR
Group, Inc. (the "Company"), include "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including, in particular and without limitation, the statements contained
in the discussions under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations". Forward-looking statements
involve known and unknown risks, uncertainties and other factors that could
cause the Company's actual results, performance and achievements, whether
expressed or implied by such forward-looking statements, to not occur or be
realized or to be less than expected. Such forward-looking statements generally
are based upon the Company's best estimates of future results, performance or
achievement, based upon current conditions and the most recent results of
operations. Forward-looking statements may be identified by the use of forward
- -looking terminology such as "may", "will", "expect", "intend", "believe",
"estimate", "anticipate", "continue" or similar terms, variations of those terms
or the negative of those terms. You should carefully consider such risks,
uncertainties and other information, disclosures and discussions which contain
cautionary statements identifying important factors that could cause actual
results to differ materially from those provided in the forward-looking
statements.
Although the Company believes that its plans, intentions and
expectations reflected in or suggested by such forward-looking statements are
reasonable, it cannot assure that such plans, intentions or expectations will be
achieved in whole or in part. You should carefully review the risk factors
described and any other cautionary statements contained in the Company's Annual
Report on Form 10-K for the fiscal year ended December 31, 2002, as filed with
the Securities and Exchange Commission on March 31, 2003 (the "Company's Annual
Report on Form 10-K", and the cautionary statements contained in this Quarterly
Report). All forward-looking statements attributable to the Company or persons
acting on its behalf are expressly qualified by the risk factors (see Item 1 -
Certain Risk Factors) and other cautionary statements in the Company's Annual
Report on Form 10-K and in this Quarterly Report. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
OVERVIEW
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The Company is a supplier of in-store merchandising and marketing
services both throughout the United States and internationally. The Company's
operations are divided into two divisions: the Merchandising Services Division
and the International Division. The Merchandising Services Division provides
merchandising services, database marketing, teleservices and marketing research
to manufacturers and retailers with product distribution primarily in mass
merchandisers, drug chains and grocery stores in the United States. The
International Division established in July 2000, currently provides
merchandising services through a joint venture in Japan and focuses on expanding
the Company's merchandising services business throughout the world.
11
SPAR GROUP, INC.
MERCHANDISING SERVICES DIVISION
The Company provides nationwide retail merchandising and marketing
services to home entertainment, PC software, general merchandise, health and
beauty care, consumer goods and food products companies in mass merchandisers,
drug chains and retail grocery stores throughout the United States.
Merchandising services primarily consist of regularly scheduled dedicated routed
services and special projects provided at the store level for a specific
retailer or multiple manufacturers primarily under single or multi-year
contracts. Services also include stand-alone large-scale implementations such as
new store openings, new product launches, special seasonal or promotional
merchandising, focused product support and product recalls. These services may
include sales enhancing activities, such as, ensuring client products authorized
for distribution are in stock and on the shelf, adding new products that are
approved for distribution but not presently on the shelf, setting category
shelves in accordance with approved store schematics, ensuring shelf tags are in
place, checking for the overall salability of client products, setting new and
promotional items, and placing and/or removing point of purchase and other
related media advertising. Specific in-store services can be initiated by
retailers or manufacturers, and include new store openings, new product
launches, special seasonal or promotional merchandising, focused product support
and product recalls.
The Company's Merchandising Services Division consists of: (1) SPAR
Marketing, Inc. ("SMI") (an intermediate holding company), SPAR Marketing Force,
Inc. ("SMF"), SPAR Marketing, Inc., ("SMNEV"), SPAR/Burgoyne Retail Services,
Inc. ("SBRS"), and SPAR, Inc. ("SINC") (collectively, the "SPAR Marketing
Companies"); and (2) PIA Merchandising, Co., Inc., Pacific Indoor Display d/b/a
Retail Resources, Pivotal Sales Company and PIA Merchandising Ltd.
(collectively, "PIA" or the "PIA Companies"). The SPAR Marketing Companies are
the original predecessor of the current Company and were founded in 1967. The
PIA Companies, first organized in 1943, are also a predecessor of the Company
and a supplier of in-store merchandising services throughout the United States,
and were deemed "acquired" by the SPAR Marketing Companies for accounting
purposes pursuant to the Merger on July 8, 1999 (see Merger and Restructuring in
the Company's Annual Report on Form 10-K).
INTERNATIONAL DIVISION
In July 2000, the Company established its International Division, SPAR
Group International, Inc. ("SGI"), to focus on expanding its merchandising
services business worldwide. Also in July 2000, the Company entered into a joint
venture with a large Japanese distributor and together established SPAR FM to
provide merchandising services in Japan.
CRITICAL ACCOUNTING POLICIES
- ----------------------------
The Company's critical accounting policies, including the assumptions
and judgments underlying them, are disclosed in the Company's Annual Report on
Form 10-K in Note 2 to the Financial Statements. These policies have been
consistently applied in all material respects and address such matters as
revenue recognition, depreciation methods, asset impairment recognition,
business combination accounting, and discontinued business accounting. While the
estimates and judgments associated with the application of these policies may be
affected by different assumptions or conditions, the Company believes the
estimates and judgments associated with the reported amounts are appropriate in
the circumstances. Two critical accounting policies are revenue recognition and
allowance for doubtful accounts:
12
SPAR GROUP, INC.
REVENUE RECOGNITION
The Company's services are provided under contracts, which consist
primarily of service fees and per unit fee arrangements. Revenues under service
fee arrangements are recognized when the service is performed. The Company's per
unit contracts provide for fees to be earned based on the retail sales of
client's products to consumers. The Company recognizes per unit fees in the
period such amounts become determinable.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company continually monitors the collectability of its accounts
receivable based upon current customer credit information available. Utilizing
this information, the Company has established an allowance for doubtful accounts
of approximately $686,000 and $301,000 at March 31, 2003 and December 31, 2002,
respectively. Historically, the Company's estimates have not differed materially
from the actual results.
13
SPAR GROUP, INC.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
- -------------------------------------------------------------------------------
The following table sets forth selected financial data and data as a
percentage of net revenues for the periods indicated (in thousands except
percent data).
THREE MONTHS ENDED
---------------------------------------------------------------------
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
%Incr.
Amount % Amount % (Decr.)
------ --- ------ --- -------
Net Revenues $18,739 100.0% $16,046 100.0% 16.8 %
Cost of revenues 11,251 60.0% 9,751 60.8% 15.4 %
Selling, general and administrative expense 4,943 26.4% 4,967 31.0% (0.5)%
Depreciation and amortization 378 2.0% 417 2.6% (9.3)%
Interest expense 68 0.4% 48 0.3% 41.3 %
Other expense 38 0.2% 82 0.5% (53.9)%
------- ---- ------- ----
Income before provision for income taxes 2,061 11.0% 781 4.9% 163.9 %
Income tax provision 783 4.2% 299 1.9% 162.0 %
------- ---- ------- ----
Net income $ 1,278 6.8% $ 482 3.0% 165.1 %
======= ==== ======= ====
Net revenues for the three months ended March 31, 2003, were $18.7
million, compared to $16.0 million for the three months ended March 31, 2002, an
increase of 16.8%. The increase in net revenues of 16.8% resulted primarily from
increased project revenue from a particular client.
One customer accounted for 28% of the Company's net revenues for both
the three months ended March 31, 2003 and 2002. This customer also accounted for
approximately 42% and 34% of accounts receivable at March 31, 2003, and 2002,
respectively.
14
SPAR GROUP, INC.
A second customer accounted for 14% and 0.1% of the Company's net
revenues for the three months ended March 31, 2003 and 2002, respectively. This
customer also accounted for approximately 17% of accounts receivable at March
31, 2003, and substantially all of the Company's increase in net revenues.
A third customer accounted for 11% and 14% of the Company's net revenues
for the three months ended March 31, 2003 and 2002, respectively. This customer
also accounted for approximately 2% and 5% of accounts receivable at March 31,
2003 and 2002, respectively.
Approximately 16% and 22% of the Company's net revenues for the three
months ended March 31, 2003, and 2002, respectively, resulted from merchandising
services performed at Kmart for various customers. Kmart filed for protection
under the U.S. Bankruptcy Code in January of 2002 and emerged from bankruptcy in
May of 2003. During its time in bankruptcy, Kmart closed a number of stores in
the United States. While the Company's customers and the resultant contractual
relationships are with various manufacturers and not this retailer, a
significant reduction of this retailer's stores or cessation of this retailer's
business would negatively impact the Company.
Cost of revenues consists of field in-store labor and field management
wages, related benefits, travel and other direct labor-related expenses. Cost of
revenues as a percentage of net revenues decreased 0.8% to 60.0% for the three
months ended March 31, 2003, compared to 60.8% for the three months ended March
31, 2002. Approximately 84.1% and 64.7% of the Company's costs of revenue in the
three months ended March 31, 2003, and 2002, respectively, resulted from field
in-store independent contractor and field management services purchased from the
Company's affiliates, SPAR Marketing Services, Inc. ("SMS"), and SPAR Management
Services, Inc. ("SMSI"), respectively. SMS's and SMSI's increased shares of
field services resulted from their more favorable cost structure.
Operating expenses include selling, general and administrative expenses
as well as depreciation and amortization. Selling, general and administrative
expenses include corporate overhead, project management, information technology,
executive compensation, human resources expenses, legal and accounting expenses.
The following table sets forth the operating expenses as a percentage of net
revenues for the time periods indicated (in millions except percent data):
THREE MONTHS ENDED
------------------------------------------------------------------------
Incr.
MARCH 31, 2003 MARCH 31, 2002 (Decr.)
--------------------------- -------------------------- -----------
Amount % Amount % %
Selling, general and administrative $ 4.9 26.4% $ 5.0 31.0% (0.5)%
Depreciation and amortization 0.4 2.0 0.4 2.6 (9.3)
Selling, general and administrative expenses were $4.9 million for the
three months ended March 31, 2003 compared to $5.0 million for the three months
ended March 31, 2002, a decrease of $0.1 million or 0.5%. The decrease is due
primarily to less software maintenance expense in 2003. The Company purchased
$0.4 million of information technology from its affiliate SPAR Infotech, Inc.
for both the three months ended March 31, 2003 and 2002.
15
SPAR GROUP, INC.
OTHER EXPENSE
Other expense represents the Company's share in the Japanese joint
venture loss totaling $38,000 and $82,000 for the three months ended March 31,
2003, and March 31, 2002, respectively.
INCOME TAXES
The income tax provision represents a combined federal and state income
tax rate of 38% for both the three months ended March 31, 2003 and 2002.
NET INCOME
The Company had net income of $1.3 million for the three months ended
March 31, 2003, or $0.07 per diluted share compared to net income of $0.5
million or $0.03 per diluted share for the corresponding period last year.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 2003, the Company had net income of
$1.3 million. Net cash provided by operating activities for the three months
ended March 31, 2003, was $7,000, compared with net cash provided by operations
of $4.4 million for the three months ended March 31, 2002. The decrease in cash
provided by operating activities was a result of increased accounts receivable
and prepaid expenses and other current assets and restructuring payments offset
by net income and increases in accounts payable, accrued expenses and other
current liabilities.
Net cash used in investing activities for the three months ended March
31, 2003, was $0.4 million, compared with net cash used in investing activities
of $0.1 million for the three months ended March 31, 2002. The net cash used in
investing activities in 2003 resulted from the purchases of property and
equipment and the capitalization of software development costs.
Net cash provided by financing activities for the three months ended
March 31, 2003, was $0.4 million, compared with net cash used in financing
activities of $4.3 million for the three months ended March 31, 2002. The
increase in net cash provided by financing activities was primarily a result of
borrowings of the line of credit, offset by repayments of stockholder debt.
The above activity resulted in no change in cash and cash equivalents
for the three months ended March 31, 2003, as the Company utilizes excess cash
to pay down its line of credit.
At March 31, 2003, the Company had positive working capital of $10.5
million as compared to positive working capital of $6.3 million at December 31,
2002. The increase in working capital is due primarily to increases in accounts
receivable and prepaid expenses and decreases in restructuring charges and
stockholder debt partially offset by increases in accounts payable and accrued
expenses. The Company's current ratio was 2.01 at March 31, 2003, and 1.49 at
December 31, 2002.
16
SPAR GROUP, INC.
In January 2003, the Company and Whitehall Business Credit Corporation
("Whitehall"), as successor to the business of IBJ Whitehall Business Credit
Corporation, entered into the Third Amended and Restated Revolving Credit and
Security Agreement and related documents (the "New Credit Facility"). The New
Credit Facility provides the Company and its subsidiaries (collectively, the
"Borrowers") with a $15.0 million revolving credit facility (the "New Revolving
Facility") that matures on January 23, 2006. The New Revolving Facility allows
the Borrowers to borrow up to $15.0 million based upon a borrowing base formula
as defined in the agreement (principally 85% of "eligible" accounts receivable).
The New Revolving Facility bears interest at Whitehall's "Alternative Base Rate"
or LIBOR plus two and one-half percent and is secured by all the assets of the
Company and its subsidiaries. The New Revolving Facility interest rate was
Whitehall's "Alternate Base Rate" of 4.75% per annum at March 31, 2003.
The New Credit Facility replaces a previous 1999 agreement, as amended,
between the Company and IBJ Whitehall Business Credit Corporation (the "Old
Credit Facility") that was scheduled to mature on February 28, 2003. The Old
Credit Facility provided for a $15.0 million revolving credit facility (the "Old
Revolving Facility"), as well as, a $2.5 million term loan. The Old Revolving
Facility allowed the borrowers thereunder to borrow up to $15.0 million based
upon a borrowing base formula as defined in the old agreement (principally 85%
of "eligible" accounts receivable). The term loan under the Old Credit Facility
amortized in equal monthly installments of $83,334 and was repaid in full as of
December 31, 2001.
The New Credit Facility contains certain financial covenants (amending,
restating and replacing those contained in the Old Credit Facility) that must be
met by the Borrowers on a consolidated basis, among which are a minimum "Net
Worth", a "Fixed Charge Coverage Ratio", a capital expenditure limitation and a
minimum EBITDA, as such terms are defined in the respective agreement. The
Company was in compliance with such financial covenants March 31, 2003.
The balances outstanding on the revolving lines of credit were $3.6
million under the New Revolving Facility at March 31, 2003, and $0.1 million
under the Old Revolving Facility at December 31, 2002. As of March 31, 2003,
based upon the borrowing base formula, the SPAR Group had availability of $6.3
million of the $11.4 million unused revolving line of credit under the New
Revolving Facility.
As of March 31, 2003, a total of approximately $1.0 million in loans
remained outstanding under notes with certain stockholders. These notes had an
interest rate of 8% and were due on demand. The New Credit Facility contains
certain conditions on the repayment of stockholder debt, these conditions were
met, and the Company repaid $1.0 million, the remaining balance due on those
stockholder debt, in April 2003.
Management believes that based upon the Company's current working
capital position and the New Credit Facility, funding will be sufficient to
support ongoing operations over the next twelve months. However, delays in
collection of receivables due from any of the Company's major clients, or a
significant reduction in business from such clients, or the inability to acquire
new clients, would have a material adverse effect on the Company's cash
resources.
17
SPAR GROUP, INC.
In connection with the sale of SPAR Performance Group, Inc. ("SPGI") on
June 30, 2002, as disclosed in the Company's Annual Report on Form 10-K in Note
1 to the Financial Statements, the Company sold all of the stock of its
subsidiary, SPGI. In connection with the sale, SPGI issued two Term Loans
totaling $6.0 million, which due to their speculative nature have been fully
reserved. The Company also agreed to provide a discretionary revolving line of
credit to SPGI not to exceed $2.0 million (the "SPGI Revolver") through
September 30, 2005. The SPGI Revolver is secured by a pledge of all the assets
of SPGI and is guaranteed by its parent, Performance Holdings, Inc.. In
addition, due to the speculative nature of the SPGI Revolver, the Company has
established a reserve for collection of approximately $0.8 million against the
$2.0 million SPGI Revolver commitment. This reserve is included in other current
liabilities. Under the SPGI Revolver terms, SPGI is required to deposit all of
its cash to the Company's lockbox. At March 31, 2003, the Company owed SPGI
approximately $0.7 million for excess cash deposited into the Company's lockbox,
which obligation is recorded in other current liabilities.
CERTAIN CONTRACTUAL OBLIGATIONS
The following table contains a summary of certain of the Company's
contractual obligations by category as of March 31, 2003 (in thousands).
- --------------------------------------------------------------------------------------------------------------------
CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
---------------------------------------------------------------------------
Total Less than 1 1-3 years 3-5 years More than 5
year years
- --------------------------------------------------------------------------------------------------------------------
Long-Term Debt Obligations $ 3,617 $ - $ 3,617 $ - $ -
- --------------------------------------------------------------------------------------------------------------------
Due to Stockholders 951 951 - - -
- --------------------------------------------------------------------------------------------------------------------
Operating Lease Obligations 2,803 1,010 1,413 380 -
- --------------------------------------------------------------------------------------------------------------------
Total $ 7,371 $ 1,961 $ 5,030 $ 380 $ -
- --------------------------------------------------------------------------------------------------------------------
In addition to the above table, the Company had agreed to provide a
discretionary line of credit to SPGI of approximately $2.0 million and currently
holds excess cash deposits of approximately $0.7 million, as discussed in
Liquidity and Capital Resources (above).
18
SPAR GROUP, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk related to the variable interest
rate on the line of credit and the variable yield on its cash and cash
equivalents. The Company's accounting policies for financial instruments and
disclosures relating to financial instruments require that the Company's
consolidated balance sheets include the following financial instruments: cash
and cash equivalents, accounts receivable, accounts payable and long-term debt.
The Company considers carrying amounts of current assets and current liabilities
in the consolidated financial statements to approximate the fair value for these
financial instruments because of the relatively short period of time between
origination of the instruments and their expected realization. The carrying
amount of the line of credit approximates fair value because the obligation
bears interest at a floating rate. The carrying amount of debt due to certain
stockholders approximates fair value because the obligation bears interest at a
market rate. The Company monitors the risks associated with interest rates and
financial instrument positions. The Company's investment policy objectives
require the preservation and safety of the principal, and the maximization of
the return on investment based upon the safety and liquidity objectives.
Currently, the Company's income derived from international operations is
not material and, therefore, the risk related to foreign currency exchange rates
is not material.
The Company has no derivative financial instruments or derivative
commodity instruments in its cash and cash equivalents and investments. Excess
cash is normally used to pay down the revolving line of credit.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's Chief Executive Officer, Robert Brown, and Chief Financial
Officer, Charles Cimitile, have reviewed the Company's disclosure controls and
procedures within 90 days prior to the filing of this report. Based upon this
review, these officers believe that the Company's disclosure controls and
procedures are effective in ensuring that material information related to the
Company is made known to them by others within the Company.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls during the
quarter covered by this report or from the end of the reporting period to the
date of this Form 10-Q.
19
SPAR GROUP, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No change.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 2(a): Not applicable
Item 2(b): Not applicable
Item 2(c): Not Applicable
Item 2(d): Not Applicable
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Item 3(a) Defaults under Indebtedness: None.
Item 3(b) Defaults under Preferred Stock: Not Applicable.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5: OTHER INFORMATION
Not applicable.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS.
99.1 Certification of the CEO pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
99.2 Certification of the CFO pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, and filed herewith.
REPORTS ON FORM 8-K.
On April 30, 2003, the Company filed a Current Report on Form 8-K
relating to Item 9, Regulation FD Disclosure, reporting the issuance of a press
release relating to the Company's financial results for the first quarter ended
March 31, 2003.
20
SPAR GROUP, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2003 SPAR Group, Inc., Registrant
By: /s/ Charles Cimitile
--------------------------------
Charles Cimitile
Chief Financial Officer and duly
authorized signatory
21
SPAR GROUP, INC.
Certification for Quarterly Report on Form 10-Q
I, Robert G. Brown, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPAR Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Robert G. Brown
------------------------
Robert G. Brown
Chairman, President and
Chief Executive Officer
22
SPAR GROUP, INC.
Certification for Quarterly Report on Form 10-Q
I, Charles Cimitile, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPAR Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Charles Cimitile
-----------------------
Charles Cimitile
Chief Financial Officer
23